Investing For Financial Independence? Pay Attention To Key 12 Asset Class Returns

[ This analysis has been updated as of December 2020 – have a look here ]

Asset Class Returns of past decade

Below are the returns by asset class over the past 10 years and a cumulative performance of the past decade

This is quite a humbling exercise and shows how many factors there are that are driving these performances. Certain trends seem to emerge that are summarized below

We should always remember that:

Asset allocation is typically the most important driver of portfolio performance (up to 90%)
Picking the rights asset classes is key
Within asset classes individual securities are less important and we should remember how tricky Stock Picking is from the chart below

Picking Stocks was unlikely to be profitable over the past decade

Only 1 out of 5 Stocks has outperformed the S&P 500 in the last few years

Understanding how the various asset classes performed is instructive when trying to understand the performance of your portfolio
You can also learn about the wider markets and the fact that being unfamiliar with an asset class is not always an excuse for not including it in your portolio mix – we tend to have a ‘domestic’ and ‘familiar asset class’ bias and that’s why a lot of investors just focus on domestic Equities

A diversified portfolio produced very strong returns

2010 - 2020 Cumulative annualized and Annual asset class returns

Key immediate observations

It has been a very strong decade with S&P annual return of 13.4% vs. c.4% over the past 20 years – we should prepare for low returns in the years ahead
NASDAQ is the big winner and this trend seems only getting started in a COVID-19 World with an annual return of 17.8% over the past decade
On a Total Return basis, Dividend Stocks marginally underperformed the S&P 500 – if you don’t need the Cash Flow it may be more interesting to invest in the wider Equity Index
The performance of the different asset classes is very unpredictable but some volatile asset classes tend to take top spots following very poor years (e.g. Emerging Markets, Developed Markets)
Corporate Bonds consistently rank in the middle of the pack but this may change in the low yield environment we’re in. They also have support from the FED (read reviews of the TOP 3 Funds)
While perceived as safe heaven, Gold is a very volatile asset – it it benefiting from tailwinds currently but may underperform in the years ahead (akin to 2013)
While Inflation Bonds tend to rank in the lower part due to realized inflation that was lower than expected over the past 10 years they may outperform should the outlook change (learn when TIPS tend to outperform)

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Beginners often ask us:

How do I reach my goals – What investments do I need to take into consideration when e.g. Taking a Sabbatical, buying a House or saving for Early Retirement?
When should I invest – I fear that investing a lump sum in this market may have a negative impact on my returns. How can timing of buying ETFs affect my performance?

Advanced investors may avoid costly mistakes:

Challenge my Portfolio – Here is my portfolio – what am I missing? What could derail my strategy? What can I do to protect my portfolio from shocks?
Help me quickly understand – What makes Inflation Linked Bonds outperform? Bond Ladder or Bond ETFs? Why do some investors add Small Cap Value stocks to their portfolios? How can I exclude Tobacco companies from my portfolio? Are the synthetic ETFs I screened safe? What is Factor Investing?

Currently available in English, French and Polish.

By signing up for a financial coaching session you support our website and our investment research. Here are other ways to help.

Book a coaching session

Beginners often ask us:

How do I reach my goals – What investments do I need to take into consideration when e.g. Taking a Sabbatical, buying a House or saving for Early Retirement?
When should I invest – I fear that investing a lump sum in this market may have a negative impact on my returns. How can timing of buying ETFs affect my performance?

Advanced investors may avoid costly mistakes:

Challenge my Portfolio – Here is my portfolio – what am I missing? What could derail my strategy? What can I do to protect my portfolio from shocks?
Help me quickly understand – What makes Inflation Linked Bonds outperform? Bond Ladder or Bond ETFs? Why do some investors add Small Cap Value stocks to their portfolios? How can I exclude Tobacco companies from my portfolio? Are the synthetic ETFs I screened safe? What is Factor Investing?

Currently available in English, French and Polish.

By signing up for a financial coaching session you support our website and our investment research. Here are other ways to help.

Last decade may not be representative of longer trends

Risk and Annual Returns 2010-2019

The above is an indication of standalone Risk which is interesting to observe because it will show you the overall volatility
Remember that it’s also important to know the correlation of asset classes e.g. Emerging Markets has a standalone risk of 17% but prices will fall at the same time as US Stocks in a lot of the cases because they are correlated

Click here to understand how these returns compare to the last 20 years and why it may not be prudent to solely based your asset allocation on the last decade

Why these asset classes?

Equities

For this exercise the following equity asset class returns have been reviewed:

S&P 500 needs no introduction and is cornerstone to most portfolios
NASDAQ is quickly becoming an asset class that gain significant traction in a COVID-19 Economy
Dividend Stocks are favored by some investors but can be less diversified and tilled towards certain sectors / styles (e.g. value)
Developed Markets ex-US are important part of the Global Stock Market and include Japan, Europe or Australia
Emerging Markets is a volatile asset class but usually held for diversification and optionality should there was a shift of capital in global Economy towards these countries

Bonds

For this exercise the following Fixed Income asset class returns have been reviewed:

Here, selected are Long Term Treasuries that provide the best downside protection in a recession
Bonds are Blend Funds for those seeking low volatility and some income
Corporates are high quality corporate bonds (Investment Grade Rating) that are primarily held for income
Inflation Linked Bonds are Government issues Bonds that are adjusted for Inflation

Other Assets

For this exercise the following other asset class returns have been reviewed:

Cash is used as a benchmark but one needs to remember these are all nominal returns and inflation eats up into your purchasing power if you hold it
Gold is the ultimate currency that fluctuates with inflation but does not produce any income
US REITs – Real Estate is the most common benchmark for real assets that produce cash and adjust for inflation

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